The government cabinet made the selections on Monday from a list of five bidders, according to people close to the decision. The two short-listed bidders for Pekao, as the bank is commonly known, will be notified officially within a few days. The government is selling as much as 55% of the bank.

Pekao, which was Poland's retail foreign-currency bank under communism and boasts one of the country's largest retail networks with more than 600 branches, holds almost 20% of all assets in the country's banking system and 18% of outstanding loans. In June, 15% of the bank was floated on the Warsaw Stock Exchange.

The bank's closing price of 48.70 zlotys a share ($14.13) on Wednesday values the entire bank at 6.7 billion zlotys. A price for the 55%, valued at $1 billion based on the bank's share price, will be negotiated independently of the market price. People involved in the talks cautioned that due diligence and negotiations could take several months and bidders haven't indicated price bids for Pekao yet.

Notably absent from the short list is Bank Handlowy SA, Poland's second-largest commercial bank, which bought almost 5% of Pekao during the initial public offering and which placed a bid for the strategic stake now being offered. Bank Handlowy, which is 24% owned by a consortium of J.P. Morgan & Co., Swedebank and Zurich Group, had lobbied hard to buy the Pekao stake because it considers the large retail operation as a way to complement its own focus on corporate and investment banking.

The other bidders were
Deutsche Bank AG
of Germany and
Allied Irish Banks
PLC, which already owns another Polish bank, Wielkopolski Bank Kredytowy SA. News of the short list was first reported in the Polish daily newspaper Rzeczpospolita on Tuesday.

Analysts said that either of the short-listed bidders could be a strong partner for Pekao.

"They both potentially could add a lot of value to Pekao," said Denise Vergot Holle, a banking analyst for emerging Europe at Merrill Lynch in London. Either bidder could supply Pekao with additional capital and retail-finance and information-technology operations, she said.

But Pekao, which just absorbed three regional banks and has 27,000 employees, will require a large investment of time and money to become a modern financial institution, Ms. Vergot Holle said. "This is not going to be quick or easy for whoever takes over Pekao," she said, predicting that the successful bidder will need about six years to fully modernize the bank.

A Citigroup official declined to comment on Pekao, but confirmed the group's commitment to Poland. Citigroup subsidiary Citibank has had a small, but fast-growing and highly profitable commercial banking and securities operation in Poland since 1991. It recently began offering credit cards and retail accounts for wealthy individuals. If Citigroup buys Pekao, the Polish government probably will require Citigroup to fold the Citibank operation into the Polish bank, said people familiar with the terms of discussions.